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How may a trust protect my heirs from creditors?

On Behalf of | Apr 18, 2022 | Probate, Trust & Estate Administration

Advantages of creating a trust include protecting your property from creditors. If you create a revocable or “living” trust, however, creditors may seek payment for unpaid debts, as explained by Experian.com. Creditors, for example, may sue you while you are alive or sue your estate after you die.

With a living trust, you may continue owning and managing your assets during your lifetime, even after transferring them to the trust. After death, a living trust becomes irrevocable, and its remaining assets become part of your estate. The trustee named as your successor may use the money or property to pay off any debts owed.

Irrevocable trusts and protection from debts

Unlike a living trust, creating an irrevocable trust while alive results in the trust taking legal ownership of your property. Once you create an irrevocable trust and transfer assets to it, the trust owns them; you may not have the authority to control them. Absent fraud, creditors generally may not sue an irrevocable trust for your personal unpaid debts.

SmartAsset.com notes that transferring property to an irrevocable trust may shield your heirs from estate or gift taxes. When considering which assets to include, the most valuable properties may take priority if you wish to reduce taxes for your heirs.

Assets that you may transfer to a trust

Trusts may take ownership of most assets. Real estate, investments and collectibles are common assets held in trust. You may also name an irrevocable trust as the beneficiary of a life insurance policy. The trust’s written instructions may outline how a trustee may use the proceeds for your beneficiaries.

Both living and irrevocable trusts offer flexibility when safeguarding assets from creditors. Creating a suitable trust may depend on your property, heirs and future intentions.


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